Attacks on vital shipping traffic in the Red Sea straits by a determined group of militants in Yemen – a spillover from the Israeli-Hamas war in Gaza – have injected a new dose of instability into an economy of a world already struggling with rising geopolitical tensions.
The risk of escalating conflict in the Middle East is the latest in a series of unpredictable crises, including the Covid-19 pandemic and the war in Ukraine, that have landed like swipes of a bear’s claw on the global economy, which hitting it and leaving scars.
As if that wasn’t enough, more volatility awaits in the form of a wave of national elections whose effects can be profound and long-lasting. More than two billion people in about 50 countries, including India, Indonesia, Mexico, South Africa, the United States and the 27 countries of the European Parliament, will go to the polls. In total, the participants in the elections olympiad of 2024 account for 60 percent of the world’s economic output.
In stable democracies, elections take place as distrust of government rises, the electorate is deeply divided and there is deep and persistent anxiety over economic prospects.
Even in countries where elections are not free or fair, leaders are sensitive to the health of the economy. President Vladimir V. Putin’s decision this fall to require exporters to convert foreign currency into rubles was likely made in a eyes on lifting ruble and tamping down prices in the run-up to Russia’s presidential elections in March.
Winners will determine important policy decisions affecting factory subsidies, tax breaks, technology transfer, artificial intelligence development, regulatory controls, trade barriers, investment, debt relief and energy transition.
A landslide electoral victory that brings angry populists to power could push governments toward tighter controls on trade, foreign investment and immigration. Such policies, say Diane Coylea professor of public policy at the University of Cambridge, could place the global economy in “a very different world than the one we’re used to.”
In many places, skepticism about globalization is fueled by stagnant incomes, declining living standards and growing inequality. However, Ms. Coyle, “a world of diminishing trade is a world of diminishing returns.”
And it raises the possibility of a “vicious cycle,” as the election of far-right nationalists is likely to further weaken global growth and damage economic fortunes, he warned.
Many economists have compared recent economic events to the events of the 1970s, but the decade that Ms. Coyle has in mind the 1930s, when political upheavals and financial imbalances “played into populism and declining trade and then intense politics.”
The biggest election next year is in India. Currently the world’s fastest growing economy, it is vying with China as the world’s manufacturing center. Taiwan’s presidential election in January has the potential to heighten tensions between the United States and China. In Mexico, the vote will affect the government’s approach to energy and foreign investment. And a new president in Indonesia could shift policies on critical minerals like nickel.
The US presidential election will, of course, be the most important of the moment for the world economy. The upcoming contest is already affecting decision making. Last week, Washington and Brussels agreed suspend tariffs on European steel and aluminum and on American whiskey and motorcycles until after the election.
The deal allows President Biden to show a tough stance on trade deals as he battles for votes. Former President Donald J. Trump, the presumptive Republican nominee, has advocated protectionist trade policies and proposed slapping a 10 percent tariff on all goods entering the United States — a belligerent move that would surely lead to retaliation by other countries.
Mr. Trump, echoing authoritarian leaders, has also signaled that he will withdraw from America’s cooperation with Europe, withdraw support for Ukraine and pursue a more confrontational stance toward China.
“The outcome of the elections could lead to far-reaching changes in domestic and foreign policy issues, including climate change, regulations and global alliances,” the consulting firm EY-Parthenon concluded in a recent report.
The global economic outlook next year is mixed. Development in most corners of the world remains slow, and dozens of developing countries are at risk of defaulting on their sovereign debts. On the positive side of the ledger, rapidly falling inflation is prompting central bankers to cut interest rates or at least halt their rise. Reduced borrowing costs are usually an incentive to invest and buy a home.
As the world continues to be troubled by uneasy alliances and rival blocs, security concerns will likely loom even larger in economic decisions than they do now.
China, India and Turkey have stepped up to buy Russian oil, gas and coal after Europe sharply cut its purchases in the wake of Moscow’s invasion of Ukraine. At the same time, tensions between China and the United States have prompted Washington to respond to years of strong industrial support from Beijing by offering massive incentives for electric vehicles, semiconductors and other matters deemed important for national security.
Drone and missile attacks in the Red Sea by Iran-backed Houthi militias are a further sign of increasing fragmentation.
In the past few months, there has been an increase in smaller players such as Yemen, Hamas, Azerbaijan and Venezuela seeking to change the status quo, said Courtney Rickert McCaffreya geopolitical analyst at EY-Parthenon and an author of a recent report.
“Even if these conflicts are smaller, they can still affect global supply chains in unexpected ways,” he said. “Geopolitical power is becoming more dispersed,” and that increases volatility.
Houthi attacks on shipping from around the world in the Bab-el-Mandeb strait — the aptly named Gate of Grief — at the southern end of the Red Sea have pushed up freight and insurance prices and oil prices while diverting sea traffic to a large extent. longer and more expensive route around Africa.
Last week, the United States said it would expand a military coalition to ensure the safety of ships plying this commercial route, where 12 percent of global trade pass This is the largest rerouting of global trade since Russia’s invasion of Ukraine in February 2022.
Claus Vistesen, the chief eurozone economist at Pantheon Macroeconomics, said the impact of the attacks has so far been limited. “From an economic point of view, we don’t see a big increase in oil and gas prices,” Mr. Vistesen said, although he acknowledged that the attacks in the Red Sea were the “most obvious near flashpoint.”
However, the uncertainty has an impact on the economy. Businesses tend to adopt a wait-and-see attitude when it comes to investing, expanding and hiring.
“Continued volatility in geopolitical and geoeconomic relations between major economies is the biggest concern for chief risk officers in both the public and private sectors,” a mid-year survey of the World Economic Forum found.
With ongoing military conflicts, increasing attacks of extreme weather and many major elections ahead, 2024 is likely to bring even more.
